Why India’s RPO mechanism is failing

POWER PLAY: In India, distributors facing problems in buying RECs because at present, renewable power costs much more a unit compared with that of non-solar power

In India, the renewable energy certificate (REC) mechanism, introduced in 2010, is a market-based instrument to promote renewable energy and facilitate compliance of renewable purchase obligations (RPOs). It is aimed at addressing the mismatch between availability of renewable energy resources in a state and the requirement of the obligated entities to meet the RPO. The RPOs were expected to play an important role in the deployment of renewable generation capacity in subsequent years; however, it has not turned out that way. While the REC trading has improved from the previous years, the growth has not been enough to excite investors.

For example, in 2013, the REC market was reeling under tepid demand with over 23 lakh RECs going unsold for several months. The trading session at Indian Energy Exchanges (IEX), an energy exchange for trading RECs, featured RECs where supply far exceeded the demand. Due to dearth of buyers, REC market in India has crashed.

Generally, one REC is treated as equivalent to 1 mwh of renewable energy. In India, there are two categories of RECs: solar RECs and non-solar RECs. Solar RECs are issued to eligible entities for generation of electricity based on solar as renewable energy source; and, non-solar RECs are issued to eligible entities for generation of electricity based on renewable energy sources other than solar.

According to RPOs, a certain percentage of a state’s electricity generation must come from clean (renewable) energy sources. States and utilities, which can’t meet their renewable energy requirements, can buy REC from IEX to meet their needs. Such power exchanges in India have already set the ball rolling in terms of trading in RECs.

While the national action plan on climate change (NAPCC) has set an ambitious RPO target of 15 per cent by 2020, it is the state electricity regulatory commissions (SERCs) that set year-wise targets in their respective states. While 28 out of 29 states have such targets in place for solar and non-solar sources separately, there is an increasing concern over actual compliance. Data for a few major states for the past two-three years reveals that barring utilities in states such as Karnataka, most others have failed to meet their RPO targets.

The RPOs make it obligatory for generation companies, open-access consumers and captive power producers to meet part of their energy needs through green energy. While the government wants SERCs to penalise defaulting distributions companies who do not meet their RPOs, the central electricity regulation commission (CERC) advocates a wait-and-see policy. Therefore, the REC policy is not turning out to be a success.

The main problem is that though there is enough supply of RECs in the energy exchanges, there is not enough demand as states are not forcing their utilities and industries to meet their RPOs. The trading has been lacklustre as there is no urgency for states to buy REC until the end of the fiscal year in March when they have to meet their compliance numbers. This delay has led to low trading of REC, which has made price discovery difficult.

Also, the delay acts as a major problem for green energy producers as they can’t get remunerative prices as the market does not exist in a proper form. The green energy producers who had set up their plants basing their entire business model on RPO are also facing problems. That is because trading in the energy exchanges like IEX see a massive amount of RECs being put for sale at the floor price and the distributors are not buying their mandated RECs. In a way, CERC and other states are reluctant to fine or force the distributors in buying the RECs. This means that no new green power plants will be set up and the whole RPO policy will fail.

Why are the distributors facing problems in buying RECs? At present, renewable power costs much more a unit compared with that of non-solar power. For example, at present, solar power costs between 9.30 and 12.40 a unit while that of non-solar power ranges from 1.50 to 3.30. Due to such differences, distributions companies, which are low on funds, cannot buy costly renewable power. Thus, the low cash and costly renewable power become an excuse for distributors for not complying by the RPOs or paying penalty. These RPOs and penalties would come out to be costlier.

What’s the bottomline? Presently, the RPO mechanism is not working in the way it was envisioned to do. If India wants to make RPOs successful at promoting the use of renewable energy in the country, then SERCs, CERC, and the central government must come together to make the RPOs enforceable. By doing so, one would not only save the RPO market from an imminent collapse, but also encourage renewable power adoption in India.

(The writer is on the faculty of Indian Institute of Technology, Mandi, India)